At today’s share price, the Tesco dividend forecast still looks juicy

The Tesco share price may be a lot higher than it was 12 months ago. But that doesn’t mean dividends here are no longer worth considering.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Tesco plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tesco’s (LSE: TSCO) share price has risen a lot over the last year. Currently, it’s hovering around 360p – about 30% higher than the level it was at a year ago.

Now, often when a stock has this kind of explosive jump, dividends yields on offer no longer look appealing. Yet that’s not the case here, as Tesco’s payout is also rising at a rapid pace.

Created with Highcharts 11.4.3Tesco Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Rising dividends

Last financial year (ended 29 February 2024), Tesco raised its dividend payout by a healthy 11%. That took the distribution to 12.1p per share.

Should you invest £1,000 in Grainger Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Grainger Plc made the list?

See the 6 stocks

Looking ahead, further dividend growth is anticipated. For the current financial year, City analysts expect Tesco to pay out 13.1p per share. The following year, they expect 14.4p per share. At today’s share price, these estimates translate to yields of 3.7% and 4%, which are decent (especially with rates on savings accounts falling).

It’s worth noting here that dividend coverage (the ratio of earnings per share to dividends per share) is expected to remain high at around two times in the next couple of years. This is very encouraging as a high dividend coverage ratio indicates that a payout is unlikely to be slashed.

Of course, dividends are never guaranteed. And analysts’ forecasts can be off the mark at times (so they shouldn’t be relied on).

Overall though, there’s a lot to like about Tesco’s dividend, in my view. The yield is healthy, the payout is rising, and coverage is strong.

Three more reasons to be bullish

Looking beyond the dividend, there are a number of other reasons to be bullish on Tesco shares right now.

For a start, the company is performing well. Earlier this month, it lifted its annual profit forecast. One thing that’s helping Tesco increase its profits is its Clubcard loyalty scheme. This gives it a ton of valuable data on its customers and their spending habits.

Second, its market share is rising. According to market research firm Kantar, Tesco’s market share recently hit 28% – the highest level since December 2017.

Then, there’s the valuation. Currently, the forward-looking price-to-earnings (P/E) ratio using next financial year’s earnings per share forecast (28.5p) is just 12.6. I think that’s a relatively attractive multiple given the company’s recent performance. I’ll point out that the average analyst share price target is about 11% higher than the current share price.

Potential for solid returns

Of course, Tesco operates in a very competitive industry. Right now, it’s facing intense competition from both discount chains such as Lidl and Aldi and premium supermarkets such as Ocado and Marks and Spencer (which is the fastest-growing supermarket in the UK at present). So, it’s going to have its work cut out maintaining its market share. If it gets complacent, market share could start to dwindle again.

I think the stock is worth considering at current levels , however. With a relatively low valuation and a rising dividend, I believe Tesco has the potential to deliver solid returns in the years ahead.

Should you invest £1,000 in Grainger Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Grainger Plc made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Dividend Shares

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Dividend yields of up to 11%! Here are 3 UK passive income stocks to consider

Searching for ways to supercharge your passive income with UK dividend stocks? Here are three that have grabbed our writer's…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Here’s how a stock market crash could help an investor retire years early

A stock market crash can be alarming -- but for the well-prepared investor, it can also be an exceptional opportunity…

Read more »

Investing Articles

Hunting for passive income? These falling insurance giants offer 10% yields

The UK insurance sector is typically a good place to look for attractive dividend yields. Dr James Fox details two…

Read more »

Investing Articles

I asked ChatGPT for the best safe havens in the FTSE 100 amid Trump’s tariffs 

Our writer isn't convinced by the answers that AI assistant ChatGPT rattled off when asked about solid FTSE 100 defensive…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Consider targeting £8,840 of annual passive income from 363 shares in this FTSE 100 heavyweight stock!

Investing in high-dividend-paying stocks with the returns used to buy more of the shares can generate potentially life-changing passive income…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

Up 5% in the last crazy week! Are these 2 income stocks the ultimate FTSE defensive plays?

Harvey Jones picks out two FTSE 100 dividend income stocks that have actually climbed while stock markets are heading in…

Read more »

Investing Articles

2 strong FTSE 100 dividend shares to consider as recessionary risks increase

Looking for secure passive income stocks to consider buying as thumping trade tariffs loom? Here are two FTSE 100 dividend…

Read more »

Investing Articles

Income of almost 12%! 3 stunning FTSE dividend stocks now have double-digit yields

Harvey Jones is amazed by the sky-high income on offer from these FTSE 100 dividend stocks, but he's also aware…

Read more »